the nature and sources of competitive advantage l.
Download
Skip this Video
Loading SlideShow in 5 Seconds..
The Nature and Sources of Competitive Advantage PowerPoint Presentation
Download Presentation
The Nature and Sources of Competitive Advantage

Loading in 2 Seconds...

play fullscreen
1 / 24

The Nature and Sources of Competitive Advantage - PowerPoint PPT Presentation


  • 723 Views
  • Uploaded on

The Nature and Sources of Competitive Advantage. The emergence of competitive advantage Sustaining competitive advantage Competitive advantage in different market settings Types of competitive advantage: cost and differentiation. OUTLINE. What is competitive advantage?.

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'The Nature and Sources of Competitive Advantage' - Faraday


Download Now An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
the nature and sources of competitive advantage
The Nature and Sources of Competitive Advantage
  • The emergence of competitive advantage
  • Sustaining competitive advantage
  • Competitive advantage in different market settings
  • Types of competitive advantage: cost and differentiation

OUTLINE

what is competitive advantage
What is competitive advantage?
  • The potential to earn a persistently high rate of profit
  • Not the same as profitability
    • Long term investments may not show up in short term profits
      • Investing in market share, technology, customer loyalty or even executive perks
the emergence of competitive advantage
The Emergence of Competitive Advantage

How does competitive

advantage emerge?

  • External sources of
  • change e.g.:
  • Changing customer demand
  • Changing prices
  • Technological change

Internal sources

of change

Some firms

have greater creative

and innovative

capability

Resource heterogeneity

among firms means

differential impact

Some firms faster

and more effective

in exploiting change

(Time-based competition)

competitive advantage from internally generated change strategic innovation
Competitive Advantage from Internally-Generated Change: Strategic Innovation
  • Many argue innovation is the only remaining source of competitive advantage (e.g. Hamel)
    • Kao (2007) Innovation Nation: How America is Losing its Innovation Edge, Friedman (2005) The World is Flat
      • Talent is everywhere, capital is everywhere, Silicon valley is everywhere

Characteristics of innovation strategies:

    • Associated with new entrants to an industry (e.g. Nucor in steel, IKEA in furniture, Home Depot in DIY, Dell in PCs, American Apparel in casual clothing)
    • Reconcile conflicting performance goals(e.g. Toyota’s lean production system combines low cost, high quality, and flexibility. Retailers Primark and Target combine low cost with stylishness.)
    • Reconfiguring the value chaine.g.---
      • Nike’s system for manufacturing and distributing shoes totally different from traditional shoe manufacturer
      • Southwest Airlines simplification of the normal airline value chain
      • Zara’s system of design, manufacture, and distribution
sustaining competitive advantage against imitation
Sustaining Competitive Advantage Against Imitation

ISOLATING MECHANISM

REQUIREMENT FOR IMITATION

Identification - Obscure superior performance

- Deterrence--signal aggressive

Incentives for imitation intentions to imitators

- Pre-emption--exploit all available

investment opportunities

- Rely upon multiple sources of

Diagnosis competitive advantage to create

“causal ambiguity”

- Base competitive advantage upon

Resource acquisition resources and capabilities that are

immobile and difficult to replicate

competitive advantage in different industry settings trading markets and production markets
Competitive Advantage in Different Industry Settings: Trading Markets and Production Markets

SOURCE OF

IMPERFECT

COMPETITION

OPPORTUNITY

FOR COMPETITIVE

ADVANTAGE

MARKET

TYPE

  • None (efficient markets)
  • Imperfect information
  • Transactions costs
  • Systematic behavioral trends
  • Overshooting

None

Insider trading

Cost minimization

Superior diagnosis

(e.g. chart analysis)

Contrarianism

TRADING

MARKETS

Identify potential barriers to imitation (e.g. deterrence, preemption, causal ambiguity, resource immobility, etc.) & base strategy upon them.

Difficult to influence or exploit.

  • Barriers to imitation
  • Barriers to innovation

PRODUCTION

MARKETS

sources of competitive advantage
Sources of Competitive Advantage

COST

ADVANTAGE

Similar product

at lower cost

COMPETITIVE

ADVANTAGE

Price premium

from unique product

DIFFERENTIATION

ADVANTAGE

Concept of “stuck in the middle”

porter s generic strategies
Porter’s Generic Strategies

SOURCE OF COMPETITIVE ADVANTAGE

Low cost Differentiation

Industry-wide COST DIFFERENTIATION

COMPETITIVE LEADERSHIP

SCOPE

Single SegmentFOCUS

features of cost leadership and differentiation strategies
Features of Cost Leadership and Differentiation Strategies

Generic strategy Key strategy elements Resource & organizational

requirements

COST Scale-efficient plants. Access to capital. Process

LEADERSHIP Design for manufacture. engineering skills. Frequent

Control of overheads & reports. Tight cost control.

R&D. Avoidance of Specialization of jobs and

marginal customer functions. Incentives for

accounts. quantitative targets.

DIFFERENTIATION Emphasis on branding Marketing. Product

and brand advertising, engineering. Creativity.

design, service, and Product R&D

quality. Qualitative measurement and incentives. Strong cross-functional coordination.

cost advantage
Cost Advantage
  • Economies of experience curve and the benefits of market share
  • Sources of cost advantage
  • Using the value chain to analyze costs
  • Current approaches to managing costs

OUTLINE

the experience curve
The Experience Curve

The “Law of Experience”

The unit cost value added to a standard product declines by a constant % (typically 20-30%) each time cumulative output doubles.

1992

1994

Cost per unit of output (in real $)

1996

1998

2000

2002

2004

Cumulative Output

examples of experience curves
Examples of Experience Curves

Japanese clocks & watches, 1962-72

UK refrigerators, 1957-71

1960 Yen

15K 20K 30K

Price Index

50 100 200 300

75%

70% slope

100K 200K 500K 1,000K 5 10 50

Accumulated unit production Accumulated units

(millions) (millions)

the importance of market share
The Importance of Market Share
  • If all firms in an industry have the same experience curve, then:
  • Change inrelative costs over time = f (relative market share)
  • This implies that market share is linked to profitability. This is confirmed by PIMS data:

ROS (%)

-2 0 5 10

0-10 10-20 20-30 30-40 over 40

Market Share (%)

BUT: - Association does not imply causation

- Costs of acquiring market share offset the returns to market

share

drivers of cost advantage
Drivers of Cost Advantage
  • Indivisibilities
  • Specialization and division of labor

ECONOMIES OF SCALE

  • Increased dexterity
  • Improved organizational routines

ECONOMIES OF LEARNING

  • Process innovation
  • Reengineering business processes

PRODUCTION TECHNIQUES

  • Standardizing designs & components
  • Design for manufacture

PRODUCT DESIGN

  • Location advantages
  • Ownership of low-cost inputs
  • Non-union labor
  • Bargaining power

INPUT COSTS

CAPACITY UTILIZATION

  • Ratio of fixed to variable costs
  • Speed of capacity adjustment
  • Organizational slack; Motivation &
  • culture; Managerial efficiency

RESIDUAL EFFICIENCY

economies of scale the long run cost curve for a plant
Economies of Scale: The Long-Run Cost Curve for a Plant

Sources of scale economies:

- technical input/output relationships

- indivisibilities

- specialization

Cost per

unit of

output

Units of output

per period

Minimum

Efficient Plant Size: the point

where most scale economies are exhausted

the costs developing new car models including plant tooling
The Costs Developing New Car Models(including plant tooling)

$ billion

Ford Mondeo / Contour 6

GM Saturn 5

Ford Taurus (1996 model) 2.8

Ford Escort (newmodel 1996) 2

Renault Clio (1999 model) 1.3

Chrysler Neon 1.3

Honda Accord (1997 model) 0.6

BMW Mini 0.5

Rolls Royce Phantom (2003 model) 0.3

scale economies in advertising u s soft drinks
Scale Economies in Advertising: U.S. Soft Drinks

Despite the massive advertising budgets of brand leaders Coke and Pepsi, their main brands incur lower advertising costs per unit of sales than their smaller rivals.

Schweppes

SF Dr. Pepper

Tab

Diet Pepsi

Diet 7-Up

Diet Rite

Advertising Expenditure ($ per case)

0.02 0.05 0.10 0.15 0.20

Fresca

Seven Up

Dr. Pepper

Sprite

Pepsi

Coke

10 20 50 100 200 500 1,000

Annual sales volume (millions of cases)

cost advantage in short haul passenger air transport
Cost Advantage in Short-Haul Passenger Air Transport

Costs per Available Seat-Mile

Southwest Airlines United Airlines

(cents) (cents)

Wages and benefits 2.4 3.5

Fuel and oil 1.1 1.1

Aircraft ownership 0.7 0.8

Aircraft maintenance 0.6 0.3

Commissions on ticket sales 0.5 1.0

Advertising 0.2 0.2

Food and beverage 0.0 0.5

Other 1.7 3.1

Total 7.2 10.5

applying the value chain to cost analysis the case of automobile manufacture
Applying the Value Chain to Cost Analysis: The Case of Automobile Manufacture

STAGE 1. IDENTIFY THE PRINCIPAL ACTIVITIES

R&D

DESIGN

ENGNRNG

TESTING,

QUALITY

CONTROL

GOODS

INVEN-

TORIES

SALES

&

MKITG

DEALER &

CUSTOMER

SUPPORT

PARTS

INVEN-

TORIES

DISTRI-

BUTION

PURCH-

ASING

COMPONENT

MFR

ASSEMBLY

STAGE 2. ALLOCATE TOTAL COSTS

applying the value chain to cost analysis the case of automobile manufacture continued
Applying the Value Chain to Cost Analysis: The Case of Automobile Manufacture (continued)

--Plant scale for each-- Level of quality targets-- No. of dealers

component -- Frequency of defects-- Sales / dealer

-- Process technology -- Level of dealer -- Plant location support

-- Run length -- Frequency of defects

-- Capacity utilization under warranty

STAGE 3.

IDENTIFY

COST

DRIVERS

PARTS

INVEN-

TORIES

R&D

DESIGN

ENGNRNG

TESTING,

QUALITY

CONTROL

GOODS

INVEN-

TORIES

PURCH-

ASING

COMPONENT

MFR

SALES

&

MKITG

ASSEMBLY

DISTRI-

BUTION

DEALER &

CUSTOMER

SUPPORT

Prices paid --Size of commitment-- Plant scale --Cyclicality &

depend on: --Productivity of -- Flexibility of production predictabilityof sales

-- Order size R&D/design -- No. of models perplant --Customers’

--Purchases per --No. & frequency of new -- Degree of automation willingness to wait

supplier models-- Sales / model

-- Bargaining power-- Wage levels

-- Supplier location -- Capacity utilization

applying the value chain to cost analysis the case of automobile manufacture continued21
Applying the Value Chain to Cost Analysis: The Case of Automobile Manufacture (continued)

STAGE 4. IDENTIFY LINKAGES

PRCHSNG PARTS R&D COMPONENT ASSEM- TESTING GOODS SALES DSTRBTN DLR

INVNTRS DESIGN MFR BLY QUALITY INV MKTG CTMR

Designing different models around

common components and platforms

reduces manufacturing costs

Consolidation of orders to increase

discounts, increases inventories

Higher quality parts and materials

reduces costs of defects

at later stages

Higher quality in manufacturing

reduces warranty costs

STAGE 5. RECCOMENDATIONS FOR COST REDUCTION

dynamic vs static approaches to manufacturing
Dynamic vs. Static Approaches to Manufacturing

DYNAMIC

(Artisan Mode)

STATIC

(Scientific

Management Mode)

  • problem solving
  • people matched to tasks
  • create employee knowledge
  • employees control production
  • customer orientation
  • quest for “one best way”
  • planning & control by staff
  • Incentives and penalties to

ensure conformity to

objectives

PRODUCTION

SYSTEM

  • continuous, incremental improvement
  • market needs pull technology
  • product and process innovation
  • teamwork and cross-
  • functional collaboration
  • science driven
  • focused around

corporate R&D

departments

  • emphasis on big

projects

MANAGEMENT

OF

TECHNOLOGY

recent approaches to cost reduction
Recent Approaches to Cost Reduction

Dramatic changes in strategy and structure

to adjust to the business conditions of the 1990’s

Key elements:

  • Plant closures
  • Outsourcing
  • Delayering and cuts in administrative staff

The fundamental rethinking and radical

redesign of business processes to achieve

dynamic improvements in performance. e.g.:-

  • Several jobs combined into one
  • Steps of a process combined in natural order
  • Minimizing steps, controls, and reconciliation
  • Use case managers as single points of contact
  • Hybrid centralization/ decentralization

CORPORATE

RESTRUCTURING

BUSINESS

PROCESS

REENGINEERING

“Obliterate don’t automate”

harley davidson case
Harley Davidson Case
  • Identify Harley-Davidson’s strategy and explain its rationale.
  • Compare Harley-Davidson’s resources and capabilities with those of Honda. What does your analysis imply for
  • Harley’s potential to establish cost and differentiation advantage over Honda?
  • What threats to continued success does Harley-Davidson face?
  • How can Harley-Davidson sustain and enhance its competitive position?